Should TransCanada de-couple Keystone?

Shipper support matters as competition ramps up to reach the Gulf Coast

By Jeff Lewis

May 04, 2011

As TransCanada Corp. awaits the end of a regulatory marathon – yet to become as grueling as the decades-old struggle to deliver Arctic gas to southern markets, but pronounced all the same – a lineup of competitors have seized on the opportunity made available by delays that have stalled plans to build the much-anticipated Keystone XL expansion since at least 2008.

The railroad renaissance said to be underway, especially with respect to moving increased oil sands production to the Pacific coast, has been well-documented. Interest in freight movements of crude has also piqued in the United States. Producers and traders there are eager to avoid Cushing, Oklahoma – mid-winter storage levels at the Midwest trading hub were hovering around 40 million barrels – and crude currently fetches a healthy premium along the refining corridor in the Gulf Coast.

But it’s hard to imagine rail shipments really gathering much momentum beyond a trickle. That’s because the Gulf Coast premium – the past three months have seen West Texas intermediate trading at an average discount of US$12.57 per barrel and $10.54 per barrel to Louisiana Light Sweet and Brent crude oil, respectively – is too tantalizing an opportunity for shippers and producers to ignore.

ExxonMobil’s 96,000-barrel-per-day Pegasus pipeline is the only conduit that currently moves crude away from the Midwest storage hub to the Gulf, but recent months have seen a few proposals emerge from the proverbial woodwork. While the Keystone expansion languishes in environmental purgatory, Enbridge Inc. has resurrected its Monarch pipeline plan. By June, the Calgary firm aims to have enough shipper support to advance the blueprint to the regulatory stage. The pipeline would allow initial transit of 150,000 barrels per day between Cushing and Houston. More recently, plans for a new pipeline announced as part of a joint venture between U.S.-based Enterprise Products Partners LP and Energy Transfer Partners LP would provide Gulf Coast access for as much as 400,000 barrels per day of stranded oil.

Like the Monarch proposal, the Enterprise-Energy Transfer project has yet to finalize firm shipping commitments. But unlike both Keystone and Monarch, it is not an entirely new project. Current plans call for conversion of a 240-mile gas pipeline in Texas. The remaining 60 per cent of the route would follow existing pipeline rights-of-way. The proponents anticipate their line will be in service before Keystone, raising the stakes in an already heated race to cash in on current market trends.

Does it make sense for TransCanada to pull back on the scope of its Keystone expansion? Alex Pourbaix, the company’s vice-president of oil pipelines, didn’t rule out the possibility in a February conference call with investors and analysts. Nor did he wholeheartedly endorse the idea. The reason? Shipper support. Even as far back as 2008, TransCanada had secured as much as 380,000 barrels per day of contracted volumes from the Western Canadian Sedimentary Basin for the Keystone proposal. And when I spoke with Imperial Oil Ltd. chief executive Bruce March earlier this year, he indicated that number had only increased. “They’re fully subscribed,” March said.